Funding public projects is a complicated business

Money to build public infrastructure is tight in the wake of the end of stimulus funding from the federal government.

“We are coming off of a difficult beginning of 2011, but the good news is that the causes for that slowdown are fairly easy to identify, and all of them are temporary in nature,” said Matt Hogan, an attorney with Sherman & Howard LLC in Denver.

Municipalities, which are interested in building public projects by using tax-exempt bonds, are struggling to fund structures such a, water-treatment plants and public transportation systems using traditional funding from the federal government.

“When economic times were different, decisions didn’t always have the consequences that they do now,” said Tom Peltz, co-chair of the Denver Public Finance Practice Group at Kutak Rock LLP in Denver. “Now the tax base has declined, and many have been involved in derivatives with unintended consequences. This has led to a cataclysmic change to the way deals are being done. Even simple deals have a level of complexity.”

Budgets were exhausted going into the year because many projects were rushed to be completed before stimulus funding ran out at the end of 2010. Now in order to complete new projects, local governments are seeking funding outside of federal resources.

“We have worked on a number of projects with private-sector involvement,” said Helen Atkeson, a partner with Hogan Lovells LLP in Denver. “Governments are having to look that way given the lack of resources. Future projects won’t be able to only draw from traditional sources for the funding they need.”

Public infrastructure traditionally has been funded by tax-exempt bonds, but as the public hesitates to invest in these bonds, much of this funding has disappeared.

“Governments used to be the safest place to put your money because no one thinks that a government would go out of business,” Atkeson said. “But now there are troubled municipal entities where people have lost money in municipal bonds. Borrowings have gone from a fairly straightforward transaction to being much more complicated.”

Municipalities now are establishing public-private partnerships with companies that will assume substantial financial risk for the project in exchange for the ability to profit from government fees such as tolls and applicable taxes.

“Governments would traditionally hire somebody to build a facility who would take off when it was done, and the approach to designing a project is very different when you just come in and then leave,” said Jim Mulligan, a partner at Snell & Wilmer LLP in Denver. “If you look at how you design for a much longer life cycle, it’s more cost-efficient and less expensive over the long term if you are penalized if it is not operating efficiently.”

No matter who is funding a project, unexpected fees that arise from the inability to complete and operate the facility on budget can be avoided if clear terms are established.

“It is important that the issuer understands the structure and from what pot of money they will repay bonds from the beginning,” said Fred Marienthal, a partner at Kutak Rock. “We need to have level-headed decision makers feel comfortable with what they’ve said to the marketplace in an official statement. Everyone needs the same story.”

The responsibility to complete a facility within budget and time constrictions is heightened by how these projects affect the community.

“You’re not just financing a warehouse or widget, you’re working on the public overlay,” Atkeson said. “The public reaction to that keeps it interesting, but it can create challenges.”